Tips for Successful Freelancing #4: Taxes

One of the hard facts of freelance life is that next to none of your clients will do your tax withholdings for you like a "regular" employer. This means you will need to take a certain amount out of your paycheck each month for income taxes, state taxes (if applicable), Social Security and Medicare. A good ballpark figure for this is around 25%. This is probably more than you'll need, but it's much better to err on the side of caution. This accounts for what they call the "Self-Employment Tax", which is essentially a replacement for what would be withheld anyway.

If you make more than a certain amount of money in a given quarter, you will also need to file quarterly income tax returns. This is actually a good thing. Quarterly income filings serve two purposes that are beneficial to you, the freelancer. 1) They allow you to pay your taxes incrementally so you aren't lumbered with a $4,000 tax bill come April 15 and 2) they indicate that you are making enough money for the IRS to want a piece. Believe me when I say that if you don't make enough money to necessitate filing quarterly returns, you are in, to use a technical term "deep shit."

The cutoff for quarterly returns comes when you owe at least $1,000 in taxes that quarter. Generally, if you make about $8,000 in a quarter, you will need to file a quarterly return. $6,000> and you will probably not have to file quarterly.

Despite the dread associated with them, the IRS maintains a surprisingly helpful website, complete with all the forms you will need to fill out. If you're having trouble ascertaining whether or not you need to file quarterly returns, here is a link to the IRS Telephone Assistance directory.

http://www.irs.gov/help/article/0,,id=96730,00.html

Above all, remember to take the 25% for taxes out of your paycheck IMMEDIATELY. Either put it into a separate account or cash it and stick it in a jar and hide it. Do whatever you need to do to keep your hands off it! The last thing you want is to face April 15 without having saved for your taxes.